Incomplete contracts and the boundaries of the multinational firm

Daniel Trefler and Nathan Nunn

Scholarly Articles from Harvard University Department of Economics

Abstract: Using data on U.S. intra-ï¬ rm and arm’s-length imports for 5,705 products imported from 220 countries, we examine the determinants of the share of U.S. imports that are intra-ï¬ rm. We examine two predictions that arise from Antrà s (2003), Antrà s & Helpman (2008) and Antrà s & Helpman (2004). First, we ï¬ nd that, consistent with the implicit logic of Antrà s (2003) and the explicit predictions of Antrà s & Helpman (2008), vertical integration is increasing in the importance of non-contractible headquarter inputs relative to non-contractible supplier inputs. In other words, we show that only non-contractible headquarter inputs affect the ï¬ rm’s make-or-buy decision. Second, we also provide empirical support for the Antrà s & Helpman (2004) prediction that intra-ï¬ rm trade is largest where non-contractible headquarter inputs are important and productivity is high.

Date: 2013
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Published in Journal of Economic Behavior & Organization

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